Hungarian Banks Face Record Tax Burden in Cabinet’s Plan

Hungarian commercial banks, which pay the highest bank levy in Europe, face a further erosion in profitability as Prime Minister Viktor Orban raises taxes and adds new charges on the financial industry.

Economy Minister Mihaly Varga yesterday said authorities will boost the financial-transaction tax to 0.6 percent on cash withdrawals from 0.3 percent and to 0.3 percent on wire transfers from 0.2 percent, based on an agreement with lenders, which the bank association denied. The Cabinet also wants banks to return 7 percent of municipal loans assumed by the state, or 48 billion forint ($219 million), the ministry said today.

“Predictability suffered a blow again,” said analyst Attila Gyurcsik at Concorde Securities Zrt. in Budapest “Just when we thought we were approaching a consolidation stage and a return to business as usual, it turns out no to be the case.”

Hungary’s banking industry was unprofitable for the second consecutive year in 2012 as total lending fell and bad loans rose. “Weak profitability” will persist in the next two years, the central bank said June 14, citing Orban’s reliance on extraordinary taxes on banks and other industries to rein in the budget deficit and exit European Union monitoring for budget offenders after nine years.

The government last year backtracked on a pledge to cut the special bank tax in half even as a slump in lending jeopardized the country’s emergence from a recession.

‘Better Off’

The charge on local council loans doesn’t qualify as selective default as the debt assumption and banks’ payment obligations are “legally separate issues,” the Economy Ministry said in a statement today. Banks “are better off” as the debt takeover allows the industry to free up provisions, the ministry said.

OTP Bank Nyrt., Hungary’s largest lender, fell as much as 2.5 percent yesterday after the announcement, the most in more than two weeks. The stock traded 0.5 percent weaker at 4,848 by 2:29 p.m. in Budapest. The benchmark BUX index declined 0.4 percent to the lowest in more than a week, falling for a second day. OTP competes with Italy’s Intesa Sanpaolo SpA and UniCredit SpA, Austria’s Erste Group Bank AG and Raiffeisen Bank International AG.

Hungary’s Bank Association denied reaching an agreement on tax changes during talks with the Cabinet, it told state news agency MTI yesterday. Banks will only support taxes that help economic growth, the body said.

Tax Compromise

Bank Association President Mihaly Patai said on April 10 that banks were seeking a bank-tax compromise that would allow them to write off part of the extraordinary levy in exchange for higher lending once Hungary exits the EU’s excessive-deficit procedure.

Banks also received “a firm pledge” from the government that the Cabinet won’t impose a haircut on municipal bonds taken over by the state, he said on April 8.

Orban announced last year the central government would take over debts from municipalities to ease their repayment burden. Under the program, the state consolidated the entire debt load of municipalities with 5,000 inhabitants or less and partially took over the debt of the rest.

Under the government’s program of assuming local council debt, banks were promised not to incur any losses, Raiffeisen said in a focus presentation on May 28. The bank refused to comment on the government’s latest measures.

Other Taxes

Hungary, which also raised a tax on phone calls and mining royalties, is taking the additional measures to keep the country out of budget monitoring once the exit is granted, Varga said yesterday. The inflation rate, at 1.8 percent in May, resulted in a revenue shortfall on the value-added and financial-transaction taxes, he said.

The Magyar Nemzeti Bank, which is trying to prop up lending to boost growth, is offering 750 billion forint ($ billion) in interest-free funds that commercial banks will use to extend credit to small and medium-size companies.

The plan “may realistically lead to a turnaround in lending,” central bank President Gyorgy Matolcsy said on May 29.

Policy makers slashed the benchmark interest rate for a 10th month in a row in May, bringing borrowing costs to a record-low 4.5 percent in a bid to help ignite growth after last year’s recession.

The central bank probably will keep cutting interest rates in quarter-point steps, Monetary Council member Gyula Pleschinger told the Wall Street Journal yesterday.